Jon Dulin and his wife were doing all the right things financially. They put money away for retirement and had a solid emergency fund. That is, until they noticed that there was staining on the outside of their house, around the windows and gutters.
“We found out that it was actually a pretty big problem,” said Dulin, 37, who lives in Pennsylvania in the US. Due to poor construction, water was getting trapped in the walls of their house, rotting the wood. The repair cost: $50,000.
“It was jaw dropping,” said Dulin, who writes at MoneySmartGuides.com. “This is basically wiping out our emergency fund.” Because of the unexpected dent in their savings, the couple will have to slow their retirement savings for the next few years while they rebuild their emergency money. “It’s frustrating.”
When your savings suddenly disappear, what you do next matters.
An unexpected — and major — expense is just one way your savings could take a bad turn. A losing stock market turn could also wipe out years of savings. Just ask anyone who lost money when stocks plunged in 2008. In the US, workers lost an average of 24% from their 401(k) retirement accounts that year. And more than half of US parents with 529 college savings plans saw their balances go down in 2008, with almost a quarter reporting a decline of more than 30%. In the UK, the 2008 financial crisis led to an £815bn ($1.16tn) decrease in wealth overall — an average of almost £31,000 ($44,190) per household — because of a plunge in housing prices and a drop in the value of pension funds and investments.
When your savings suddenly disappear, what you do next matters. “The bottom line is that you now have fewer resources than you expected,” said Mark LaSpisa, a financial planner with Vermillion Financial Advisors in Illinois in the US. “So you need to make some decisions.”
Here are a few strategies for dealing with a big financial hit.
What it will take: You’ll need patience, fortitude and the ability to look at the big picture. Losing a lot of money can be stressful and daunting, and you’ll have to make smart, but possibly different, decisions about saving and spending moving forward.
How long you need to prepare: Most big financial losses come as a surprise, but there are things you can do to absorb the hit. A healthy emergency fund with three to six months of living expenses can give you breathing room while you weigh your options — or even cover an expense in the short term. If your investment portfolio has taken a dive, it’s important to take some time to consider your options rather than take money out in a reactionary way.
One option is to borrow strategically. Sometimes it pays to use debt in the short-term while your savings recover, rather than withdrawing money from a decimated portfolio. “In 2009 one recently retired client chose to borrow money on her line of credit, rather than pull money from her IRA,” which had seen a loss, said David Demming, a financial planner with Demming Financial Services in Ohio in the US. “You want to have choices, which is why liquidity is so important. We use debt selectively, in lieu of assets, in certain environments.”
When interest rates are near zero or very low, as they have been the last several years, this might make even more sense.
Do it now: Assess the impact. “Now is the time to look objectively at all income streams and outgoings and see if savings in expenditures or increases in income from other sources could make up for some of the impact of the recent loss,” said Peter Brooke, a financial planner with the Spectrum IFA Group in Valbonne, France. “Are there things that could be sold or small jobs that could be undertaken to bring in a bit more money?”
It could be the critical piece that lets you have a comfortable retirement.
Work longer. If retirement is the thing in danger, you might have to rethink your retirement date. “I frequently counsel people that they should work a year or two or three years more, or once they go into retirement, take a part-time job,” said Larry Luxenberg, a financial planner with Lexington Avenue Capital Management in New York in the US. If you’re working at a job now making $100,000 a year, you might not think that working part time and making $20,000 in retirement is worth it. “But it could be the critical piece that lets you have a comfortable retirement,” Luxenberg said.
Work more. Alternatively, a part-time job or some freelance or consulting work on the side could cover an unexpected expense or replenish your depleted savings faster.
Spend less. Planning to buy a house with a down payment that was just obliterated? Consider renting or purchasing something more affordable. Ponder buying a used car rather than a new one, which depreciates the moment you drive it off the lot. Or take a road trip for your next vacation rather than flying, to save on airfares.
“It’s really sitting down and investigating your options and figuring out what’s best for you,” LaSpisa said. “In most cases it’s some kind of logical compromise.”
While all losses are painful, they are not all the same.
Don’t panic. Stock markets are cyclical. If your portfolio has plunged during a downturn and you don’t need the money immediately, don’t be too quick to cash in all your holdings. “If you’re invested in the stock market, your portfolio is going to go up and down,” Luxenberg said. “If you have a widely diversified portfolio, it’s highly likely to come back.
Retirement plan investors in the US who maintained their stock allocation after the 2008 and 2009 downturn showed average account balance increases of 50% by mid-2011, according to one study. And according to another, continuous participants in retirement plans between December 2008 and December 2013 saw median account balance growth of 182%.
By the same token, if it’s your home value that’s plummeted, don’t worry unless you need to move. “If my home goes down in value, but I am not planning on either moving or extracting cash from it, has anything really changed other than the number on a given line of my balance sheet?” said David Mendels, a financial planner with Creative Financial Concepts in New York. “While all losses are painful, they are not all the same.” This one, for the most part, could just be in your head.
Consult your financial professional. An objective third party can lend some perspective on where you are and whether your shortfall is going to wreck your financial picture. It may be that there are resources you haven’t considered and that a few small tweaks to your plan could put you on the right track.
Do it later: Decrease risk appropriately. As you approach a big milestone — college, retirement — consider putting more of the money you need into lower-risk investments. That way, you aren’t as vulnerable to a market tank right before you need the cash.
Do it smarter: Keep at it. “Honestly, the biggest mistake is giving up,” said Shannon Simmons, a financial planner with Simmons Financial Planning in Toronto. “A financial blow can be devastating and really hard on motivation. Many people who have suffered a large financial loss risk hitting the ‘screw-it’ point — the point where you stop trying.” This can lead to spiralling consumer debt, a stop to savings or an unhealthy fear of market volatility, none of which is helpful.
“The most important thing to do is keep trying,” Simmons said. “Make a plan that is realistic. Don’t set yourself up for failure with lofty goals that are completely unrealistic. Take it a little bit at a time to rebuild. Don’t lose hope.”